Vesting schedules should be longer

Startups take a very long time. Equity comp should reflect that.

Startups take a very long time. The time to exit for successful companies is now well over a decade.

It’s a bizarre anachronism for founders to be on 4 year vesting scheduling. And it’s even more bizarre for founders and employees to be on the same vesting schedule when there are radically different expectations for how long they’ll be on the journey with the company.

Expecting the average employee to stay 4 years seems reasonable. But founder and founding employee vesting schedules should obviously be longer to reflect the duration of their commitment to the company.

Founders and founding employees should have 6-8+ year vesting schedules.

The current standard makes it really messy when someone leaves and makes co-founder breakups more painful than they have to be (they’ll always be painful). And longer time to exit makes it extremely common that it will happen.

20-25% of co-founders break up within 4 years, nearly 1/3 within 6 years.(Carta) Presumably it’s higher for early “founding” employees.

Of course a change like this benefits the company overall at the expense of the founders. So there needs to be a “give” in exchange for the “get.” Fairness matters.

Here’s what I’ll give any founder in exchange: when/if your co-founder or founding employee leaves, their unvested shares should go to you directly instead of being retired (benefiting everyone pro rata). At a bare minimum, these shares should go back into the pool to exclusively use on future employees. Long term, it’s in my best interests to have the founders/important employees maximally incentivized and hard at work anyway.

Like so many other problems, this will probably never get solved because it requires collective action. But any founder who wants it, I’m game to make a deal and figure it out.

People who agree with me: Jared Hecht and Dan Gray.

Some disagreements

• It doesn’t matter because people get re-vested at the A anyway.

  • Sure but that’s a negotiating point and doesn’t always happen. More importantly, the most painful version of this is a co-founder who leaves after a year or two and takes 12-25% of the company with them. It’s often not even that dramatic - no big breakup - but rather people realize that they don’t want to be in this/don’t feel aligned. Because of survivorship bias (only the remaining cofounders get to tell the story) you don’t hear about this but it happens all the time.

• It’s tax inefficient.

  • That is a totally fair point though I’ll say that usually the tax implications are pretty minor because the valuations are quite low. At a bare minimum, founders should have the choice of taking the shares (and owning taxes) or retiring them. I saw someone propose a clever structure around a purchase option created at inception to transfer shares at a pre-set price of ≈$0 to get around this. If this becomes the norm something like that makes sense. For now, it’s a hat on a hat.

• We shouldn’t penalize founders and early employees by “paying them less”.

  • By that logic, we may as well have no vesting schedules at all and just give people all their equity upfront with no cliff and no clawback. Beyond that, I hate the concept of “total comp” (equity value divided by four, plus cash) in early stage businesses. The equity is either worth nothing or a lot more and “TC” calculated this way is a psyop by big companies to make early stage look even worse than it already is.

At the end of the day the 4 year vest is arbitrary. It’s just a number. There’s nothing sacred about it. It’s a convention that is no longer suited to purpose.

If we work from first principles and are honest about what problems the vesting schedule solves, the four year standard is almost indefensible. There’s no good argument for 4 vs 3 vs 5 beyond convention and familiarity.

Abundance

Connor Dougherty (author of Golden Gates, which is very good on CA housing) was in the Times arguing that “America Needs More Sprawl to Fix Its Housing Crisis.” His basic argument is that we can’t let the perfect be the enemy of the good when the housing crisis is so severe.

On its face, I think that’s pretty unobjectionable but what he’s actually proposing is not good enough - it’s actively shitty.

America absolutely needs to build diverse housing stock and even new communities/cities. But we can’t accept defeat on things like density, livability, commute times, infrastructure, etc. There is no reason that the only kind of exurb is transit poor, single family, and residential only.

Not everyone wants to live in a big city and that’s totally fine. But we in the blue states can’t let the only alternative be endless sprawl in the unlivable heat of Texas and Arizona. I believe we can do better and even if Connor has given up, I haven’t.